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Benchmarks in motion: The plurality of the Single Security Initiative

June 11, 2018

By: Nikki Stefanelli, managing director, benchmarks

The Single Security Initiative will be implemented on June 3, 2019, creating a new, common mortgage-backed security (MBS) to be issued and guaranteed by either Fannie Mae or Freddie Mac and called the “Uniform MBS,” or “UMBS.” Single Security represents one of the largest and most significant changes in the history of the agency securitized market... and there is a plurality in its broad implications.

Single Security will align key components of each enterprise’s current pass-through programs—Fannie Mae’s mortgage-backed securities (MBS) and Freddie Mac’s Mortgage Participation Certificates (PCs)—and allow holders of legacy Freddie Mac PCs to exchange them for new UMBS. In the non-mandatory exchange, Freddie Mac PC investors will receive compensation for alignment of their new UMBS’s feature, which determines the date on which they receive payment each month. Additionally, the large, liquid, secondary futures market for MBS that allows investors to buy and sell settled MBS using to-be-announced (“TBA”) contracts will now use a single contract that both Freddie Mac and Fannie Mae UMBS can be delivered into (each agency currently has its own contract).

Seems simple enough, right?

One might think. However, there is a broad range of market participants, each impacted in a slightly different way. Traders, portfolio managers, operations and back offices, tax accountants, lawyers, benchmark and analytics providers, regulators, and compliance teams must each consider the initiative together with a coordinated approach, along with their counterparties, customers, and even competitors.

Perhaps not so simple after all.

Case in point: FTSE Russell recently participated in the Single Security Conference, hosted by Freddie Mac and Fannie Mae in New York, to provide more than 300 attendees with an update on our readiness for the Single Security Initiative as a benchmark and analytics provider. As a speaker at the conference, I noted that the market now appears to have a deeper appreciation for the need to commit resources in preparation for the initiative in a collaborative way, given the scope of the change and now that implementation has been set to go-live in June 2019.

Notably, conference speakers also included Craig Phillips, counselor to the US Treasury Secretary, and Bob Ryan, acting deputy director in the conservatorship division at the FHFA, who voiced their support for the initiative.

In our role as benchmark providers, we see two key considerations for the FTSE US Broad Investment-Grade (USBIG) Index that tracks this market: 1) how UMBS’s are represented by index cohort construction, and 2) what is the most appropriate treatment of legacy securities (Freddie Mac Gold PCs), which are exchangeable as part of the initiative. Given that the overall size and risk profile of the agency MBS market will remain relatively unchanged, helping to ensure a smooth transition by providing visibility into benchmark transition and rebalancing will be key.

In providing index tools to help industry professionals make informed investment decisions with data and analytics, FTSE Russell must understand the end-to-end impact. The same principles of transparency and robust governance that are essential to FTSE Russell equity benchmark evolution (the recent topic of how shareholder voting rights will affect index eligibility, for example) will also be used to consider the Single Security change. We encourage users to participate in our recently launched Securitized Products consultation to provide their feedback or reach out to us for a more detailed discussion. Also look out for our upcoming whitepaper on broader changes to this industry.

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